Capital Gains and Income from Other Sources — Practice

Question 1

State whether each is a capital asset: (a) a personal wristwatch used daily; (b) a gold necklace held for personal wear; (c) stock-in-trade of a jeweller; (d) agricultural land within municipal limits meeting the specified population threshold.

Accepted Answer

Item (a), a personal wristwatch, is not a capital asset. Section 2(14) excludes personal effects, being movable property held for personal use by the assessee or a dependent family member, and an ordinary wristwatch falls within that exclusion. Item (b), the gold necklace, is a capital asset despite being personally used, because the personal effects exclusion expressly carves out jewellery, along with archaeological collections, drawings, paintings, sculptures and any work of art, from the exclusion; these items remain capital assets even where genuinely held for personal use, which inverts the ordinary intuition that personal use items are excluded. Item (c), stock-in-trade of a jeweller, is not a capital asset at all: it is expressly excluded from the definition, and its sale generates business income rather than capital gains, since it is held for trading rather than as an investment or for personal use. Item (d), agricultural land within municipal limits meeting the specified population threshold, is a capital asset: the exclusion is confined to agricultural land in rural areas, defined by distance from municipal limits and population thresholds, and land that fails that rural test by being within the specified proximity to a municipality of sufficient population is treated as an ordinary capital asset, its agricultural use notwithstanding.

Question 2

Mr. Ahuja enters into an agreement to sell a flat and hands over possession to the buyer against substantial part payment, but the registered sale deed is executed a year later. In which year does the transfer occur for capital gains purposes, and why?

Accepted Answer

The transfer occurs in the year possession was handed over under the agreement, not the later year in which the registered sale deed is executed. Section 2(47) defines transfer inclusively to cover, among other modes, any transaction involving the allowing of possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. Under that provision, a transferee who has taken possession under a contract for consideration, and has performed or is willing to perform his part of the contract, acquires a protected possessory right even without a registered conveyance. The Income-tax Act treats the handing over of possession on such terms as itself constituting a transfer for capital gains purposes, precisely so that a seller cannot defer the taxable event indefinitely by delaying registration while the substance of the transaction, possession and substantial payment, has already passed. This limb is particularly significant in real estate transactions, where builders and sellers commonly hand over possession well before formal registration, and it fixes the year of taxation at the earlier, substantive date rather than the later, formal one.

Question 3

Classify each as short-term or long-term: (a) listed equity shares held for 14 months; (b) unlisted shares of a private company held for 20 months; (c) a residential flat held for 30 months; (d) a car held for personal use, held for 40 months.

Accepted Answer

Item (a), listed equity shares, uses the 12-month threshold applicable to listed securities: held for 14 months, exceeding 12, they are long-term. Item (b), unlisted shares, uses the 24-month threshold applicable to unlisted shares: held for 20 months, not exceeding 24, they are short-term, a result candidates frequently get wrong by applying the listed-securities 12-month threshold to unlisted shares instead. Item (c), a residential flat, being immovable property, also uses the 24-month threshold: held for 30 months, exceeding 24, it is long-term. Item (d), a car, being personal use movable property that is nonetheless a capital asset if it does not fall within the personal effects exclusion or is otherwise treated as a capital asset on the facts, falls within the residual category of all other capital assets using the 36-month threshold: held for 40 months, exceeding 36, it is long-term. The pattern worth extracting is that the shorter thresholds, 12 and 24 months, apply to the categories the legislature wanted to encourage quicker liquidity classification for — listed securities and immovable property/unlisted shares respectively — while the residual 36-month threshold catches everything else.

Question 4

A plot of land was purchased in financial year 2010-11 for ₹15,00,000 and sold in financial year 2025-26 for ₹90,00,000. Assume CII for 2010-11 is 167 and CII for 2025-26 is 376. Compute the long-term capital gain, ignoring transfer expenses and improvement cost.

Accepted Answer

The asset is immovable property held well beyond the 24-month long-term threshold, so it is a long-term capital asset and indexation of cost is available in computing the gain. Indexed cost of acquisition is the actual cost multiplied by the ratio of the Cost Inflation Index of the year of transfer to the Cost Inflation Index of the year of acquisition: 15,00,000 multiplied by 376 divided by 167. That ratio is 2.2515, so indexed cost is 15,00,000 times 2.2515, that is 33,77,246 approximately. Long-term capital gain is the full value of consideration, 90,00,000, less the indexed cost of acquisition, 33,77,246, giving a long-term capital gain of approximately 56,22,754. The candidate should note that had the land instead been purchased before 1 April 2001, the assessee would have had the option to substitute the fair market value as on 1 April 2001 for actual cost, subject to that fair market value not exceeding the stamp duty value as on that date for land or buildings, and the indexation would then run from the CII of 2001-02 as the base year rather than from the CII of the actual year of acquisition, since the base year for indexation purposes is 2001-02 for any asset acquired before that date.

Question 5

Mr. Bhatt sells land for a declared consideration of ₹40,00,000. The stamp duty value of the land is ₹46,00,000. State the full value of consideration for capital gains purposes, explaining the tolerance band and its purpose. What if the stamp duty value had instead been ₹41,00,000?

Accepted Answer

Section 50C deems the full value of consideration for a transfer of land or building to be the higher of the actual consideration received or accruing and the stamp duty value adopted or assessed by the state authority for stamp duty purposes, subject to a tolerance band under which a specified percentage variance between the two is ignored and the actual consideration is accepted instead. On the first scenario, stamp duty value of 46,00,000 against declared consideration of 40,00,000, the variance is 6,00,000, which as a percentage of the declared consideration is 15%, exceeding the ordinarily applicable tolerance band; the stamp duty value of 46,00,000 is therefore taken as the full value of consideration for computing capital gains, rather than the lower declared figure. On the second scenario, stamp duty value of 41,00,000 against declared consideration of 40,00,000, the variance is only 1,00,000, which as a percentage of the declared consideration is 2.5%, within the ordinarily applicable tolerance band; in that case the declared actual consideration of 40,00,000 is accepted as the full value of consideration, and the modest stamp duty variance is disregarded. The tolerance band exists because stamp duty valuations, being administrative estimates applied uniformly across an area, can genuinely and legitimately diverge modestly from an arm's-length negotiated price without any suggestion of understatement, and penalising every minor variance would be disproportionate to the provision's real target, which is a material and suspicious gap suggesting deliberate underreporting of consideration.

Question 6

Mrs. Chopra inherited shares from her father, who had purchased them in 2015 for ₹2,00,000. Her father died in 2023, and she sold the shares in 2025-26 for ₹6,00,000. Determine her cost of acquisition, her holding period, and whether the gain is long-term or short-term.

Accepted Answer

Where a capital asset became the property of the assessee by inheritance, a mode other than purchase for consideration, the cost to the previous owner is deemed to be the cost of acquisition to the assessee, and the period of holding of the previous owner is included in computing the assessee's own holding period. Mrs. Chopra's cost of acquisition is therefore her father's original cost of 2,00,000, not any value at the date of inheritance, and her period of holding includes her father's holding from 2015 as well as her own holding from 2023 to the date of sale in 2025-26. Combining both periods, the shares have effectively been held from 2015 to 2025-26, well over ten years, which for listed shares comfortably exceeds the 12-month long-term threshold or, if unlisted, the 24-month threshold, so the gain is long-term regardless of which category the shares fall into. This provision is precisely what allows an inherited asset to qualify as long-term even where the current holder has personally held it only briefly, since the two-year gap between inheritance and sale would on its own be insufficient for the 24-month unlisted-shares threshold; it is the combination with the predecessor's holding that secures long-term status.

Question 7

Mrs. Desai sells a long-term residential house for a net consideration of ₹1,20,00,000, realising a capital gain of ₹70,00,000, and invests ₹50,00,000 in a new residential house within the prescribed period, claiming exemption under section 54. Separately, Mr. Emani sells long-term listed shares (not a residential house) for a net consideration of ₹1,00,00,000, realising a capital gain of ₹60,00,000, and invests ₹75,00,000 in a new residential house, claiming exemption under section 54F. Compute the exemption in each case, explaining the different bases used.

Accepted Answer

The two provisions use fundamentally different bases for the exemption computation, and that difference is the point of setting the two problems side by side. Section 54 exempts capital gain on transfer of a long-term residential house to the extent of the amount invested in a new residential house, the base for exemption being the gain itself rather than the full consideration. Mrs. Desai's gain is 70,00,000, of which 50,00,000 has been invested; since the amount invested is less than the full gain, the exemption is limited to the amount actually invested, that is 50,00,000, leaving 20,00,000 of the gain taxable, subject to the separate monetary ceiling on the exemption that applies under current law and to the one-residential-house investment restriction. Section 54F, by contrast, exempts capital gain on transfer of any long-term capital asset other than a residential house, and its base for computing the exemption is not the gain but the net consideration received on the original asset, since the underlying asset transferred was not itself a house; where the full net consideration is invested, the entire gain is exempt, and where only part is invested, the exemption is proportionate: Exemption equals Capital Gain multiplied by Amount Invested divided by Net Consideration. Mr. Emani has invested 75,00,000 out of net consideration of 1,00,00,000, a proportion of 75%, so his exemption is 60,00,000 multiplied by 75,00,000 over 1,00,00,000, that is 45,00,000, leaving 15,00,000 of his gain taxable. The structural lesson is that section 54 asks how much of the gain was reinvested, while section 54F asks how much of the total sale proceeds was reinvested, because section 54F is designed to encourage full redeployment of proceeds from a non-housing asset into housing, whereas section 54 is simply relieving reinvestment of a housing gain into replacement housing.

Question 8

Mr. Farooqi realises a long-term capital gain and intends to claim exemption under section 54 by constructing a new house, but construction is not complete by the date he files his return. Advise on what he must do to preserve the exemption, and the consequence of ultimately failing to complete the construction within the permitted period.

Accepted Answer

Where the assessee has not utilised the capital gain in purchase or construction of the new asset by the date of filing the return of income, the unutilised amount must be deposited in a specified bank account under the Capital Gains Account Scheme before that due date, in order to preserve the exemption claimed. Mr. Farooqi must therefore deposit the amount of the gain not yet spent on construction into a Capital Gains Account Scheme account before he files his return, and he may claim the exemption in that year's return on the strength of the deposit, treating the deposited sum as though it had already been utilised for the purpose of the exemption at that stage. He then has the balance of the prescribed period, running from the date of transfer, within which to actually complete the construction and withdraw the deposited funds for that purpose. If he ultimately fails to utilise the deposited amount within the prescribed period, that is if the construction is not completed as required, the unutilised amount is treated as long-term capital gain of the previous year in which the prescribed period expires, and is brought to tax in that later year rather than being permanently exempt or requiring the original year's assessment to be reopened, which is a deliberate simplification allowing the tax consequence to attach to the year the failure to complete becomes final rather than requiring retrospective correction of an earlier, already-filed return.

Question 9

In a previous year, Mr. Gupta has a short-term capital loss of ₹4,00,000, a long-term capital loss of ₹2,50,000, a short-term capital gain of ₹3,00,000 and a long-term capital gain of ₹6,00,000. Compute the net short-term and long-term position after set-off, applying the correct asymmetric rule.

Accepted Answer

The governing rule is asymmetric and is the single most frequently tested point in capital gains set-off: short-term capital loss can be set off against both short-term capital gain and long-term capital gain, but long-term capital loss can be set off only against long-term capital gain, and never against short-term capital gain. Applying this, the long-term capital loss of 2,50,000 can only reduce the long-term capital gain of 6,00,000, giving a net long-term position after this step of 6,00,000 less 2,50,000, that is 3,50,000. The short-term capital loss of 4,00,000 may then be set off against either or both categories of gain; a natural and generally beneficial approach is to first exhaust it against the remaining short-term gain of 3,00,000, which fully absorbs that gain and leaves 1,00,000 of short-term loss still unabsorbed, which is then set off against the long-term gain, reducing the net long-term position further from 3,50,000 to 2,50,000. The final position is therefore nil short-term capital gain, since the entire short-term gain has been absorbed, and a net long-term capital gain of 2,50,000, which is what remains chargeable to tax under this head for the year. Had the candidate incorrectly attempted to set the long-term loss of 2,50,000 against the short-term gain of 3,00,000, that would have been a straightforward error, since the rule categorically forbids using a long-term loss against short-term gain in either direction of the asymmetry.

Question 10

Mr. Hussain receives ₹60,000 in cash from a close friend as a birthday gift, and separately receives ₹1,00,000 from his brother. State the taxability of each, and explain the exception that applies to the second receipt.

Accepted Answer

The friend's gift and the brother's gift must be analysed separately because one falls within an express exception and the other does not, and their aggregate matters for the threshold test on the taxable portion. Where any sum of money is received without consideration and the aggregate of such sums received during the year exceeds 50,000, the whole aggregate amount, not merely the excess, is taxable as income from other sources, subject to specified exceptions. Money received from a relative is expressly excepted from taxation regardless of amount, and a brother is a relative for this purpose, so the 1,00,000 received from Mr. Hussain's brother is entirely exempt and does not enter the computation at all, however large the sum. The friend's gift of 60,000, however, does not fall within any exception, since a friend is not a relative for this purpose regardless of the closeness of the relationship, and it must be tested against the 50,000 threshold. Taken on its own, considering only non-exempt gifts received during the year, the friend's 60,000 exceeds the 50,000 threshold, so the whole 60,000 is taxable as income from other sources, not merely the 10,000 excess over the threshold; this all-or-nothing feature of the threshold, rather than a marginal excess-only computation, is the point most often misapplied. The brother's gift, being wholly exempt, is not aggregated with the friend's gift for the purpose of testing whether the 50,000 threshold has been crossed.

Question 11

State what deductions are available under section 57 for interest on securities and for income from letting of machinery, and explain why no general standard deduction is available under this head except for family pension.

Accepted Answer

Section 57 permits a deduction for reasonable expenditure incurred wholly and exclusively for the purpose of earning the income taxable under this head. For interest on securities and dividend income, the deduction permitted is any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising the interest or dividend on behalf of the assessee, that is a reasonable collection charge, and nothing beyond an actual, reasonable expense connected with realising the receipt. For income from letting of machinery, plant or furniture, and, where applicable, a building let along with them, the deductions permitted are current repairs to the premises or assets, insurance premium against risk of damage or destruction, and depreciation, computed as though the letting were a business, on the assets so let. In each case the deduction tracks an actual expense genuinely and demonstrably incurred to earn the specific receipt, rather than an arbitrary standard allowance. The general absence of a standard deduction under this head, in contrast to the standard deduction available against salary or the 30% standard deduction against house property's net annual value, reflects that this is a residual, catch-all head covering a wide and heterogeneous range of receipts with very different real cost structures behind them, from a pure gift with no associated cost at all to letting income with genuine maintenance costs; a single standard percentage would either overcompensate the gift-type receipts or undercompensate the genuinely cost-bearing ones, so the Act instead requires actual expenditure to be shown, item by item, except for the specific and deliberate exception of family pension, which is granted a standard one-third or specified-sum deduction in recognition that a family pensioner has no realistic means of demonstrating itemised expenses connected with simply receiving a periodic payment.

Question 12

Mr. Lokhande, whose father used agricultural land for cultivation for the last 3 years before the father's death, sells the land after inheriting it, realising a long-term capital gain of ₹18,00,000, and purchases new agricultural land within 18 months for ₹14,00,000. Advise on the exemption available under section 54B, stating the conditions.

Accepted Answer

Section 54B exempts capital gain on the transfer of agricultural land used for agricultural purposes by the assessee or a parent of the assessee for a period of 2 years immediately preceding the transfer, where the assessee purchases another agricultural land within 2 years of the transfer, to the extent of the amount so invested. The condition on prior agricultural use is satisfied by use of either the assessee himself or his parent, and here the land was used by Mr. Lokhande's father, a parent, for agricultural purposes for the 3 years before his death, which exceeds the required 2-year period; the fact that Mr. Lokhande himself only came to own the land on inheritance, and may not have personally used it agriculturally before the transfer, does not defeat the exemption, since the parent's use satisfies the condition on its own. The reinvestment condition, purchase of another agricultural land within 2 years of the transfer, is also satisfied, the purchase having been made within 18 months. The exemption is limited to the amount actually invested: Mr. Lokhande has invested 14,00,000 out of a gain of 18,00,000, so the exemption is 14,00,000, and the balance of 4,00,000 remains taxable as long-term capital gain for the year, subject to the further requirement that if the new agricultural land is itself transferred within 3 years of its purchase, the exemption originally allowed is withdrawn and added back as capital gain in the year of that subsequent transfer.

Question 13

Ms. Mahajan realises a long-term capital gain of ₹80,00,000 on the sale of a building. She invests ₹50,00,000 in NHAI bonds within 5 months of the transfer, being the maximum permitted under the annual ceiling. Compute the exemption available, and state the consequence if she sells the bonds after 3 years.

Accepted Answer

Section 54EC exempts long-term capital gain on the transfer of land or a building, where the gain is invested within 6 months of the transfer in specified bonds notified for this purpose, such as those issued by the National Highways Authority of India or the Rural Electrification Corporation, subject to a monetary ceiling on the amount that can be invested and claimed as exempt in a financial year. Ms. Mahajan's investment of 50,00,000, made within 5 months, is within the 6-month window and is stated to be at the maximum permitted under the annual ceiling of 50 lakh in a financial year, so the full 50,00,000 qualifies as the basis for exemption; since the exemption under section 54EC is measured against the amount invested up to the gain, and her gain of 80,00,000 exceeds the amount invested, the exemption is limited to the 50,00,000 actually invested, leaving 30,00,000 of the gain taxable for the year. The bonds carry a lock-in period of 5 years, and if Ms. Mahajan transfers, converts, or otherwise deals with the bonds before the expiry of that lock-in period, including by way of a loan or advance taken against the security of the bonds, the amount of capital gain originally exempted is deemed to be long-term capital gain of the previous year in which the bonds are so transferred or dealt with, and becomes taxable in that later year. Selling the bonds after 3 years, within the 5-year lock-in, would therefore trigger this withdrawal of the exemption and bring the 50,00,000 back into charge as long-term capital gain of the year of sale.

Question 14

Mr. Nanda wins ₹4,00,000 from a horse race and incurs ₹30,000 in expenses attending race meets during the year in pursuit of such winnings. His only other income is a salary of ₹3,00,000. Compute his tax position on the winnings, addressing both the rate and the deduction question.

Accepted Answer

Winnings from horse races fall within the specific category of winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort, or from gambling or betting, taxed under section 115BB at a flat rate of 30%, plus applicable surcharge and cess, entirely separate from the ordinary slab rates that apply to Mr. Nanda's other income. Two specific restrictions apply to this category that do not apply to income generally. First, no deduction is permitted for any expenditure or allowance in computing this income, so the 30,000 spent attending race meets, however genuinely incurred in pursuit of the winnings, cannot be deducted against the 4,00,000, which is taxed on its full gross amount. Second, the benefit of the basic exemption limit and of the slab-rate structure does not apply to this specific income; it is taxed at the flat 30% rate from the first rupee, regardless of the assessee's other income or overall exemption threshold. So Mr. Nanda's tax on the winnings is 30% of 4,00,000, that is 1,20,000, before surcharge and cess, computed entirely independently of his salary income of 3,00,000, which is separately taxed at the ordinary slab rates applicable to his total income after appropriate deductions, with the two computations kept distinct rather than blended together.

Question 15

Mr. Oza receives a flat as a gift from a friend, with a stamp duty value of ₹65,00,000. Separately, he buys another flat from an unrelated seller for ₹40,00,000 when its stamp duty value is ₹48,00,000. State the tax treatment of each under Income from Other Sources.

Accepted Answer

Both transactions engage the gift and inadequate-consideration provisions for immovable property, but on different bases. Where immovable property is received without consideration and its stamp duty value exceeds 50,000, the stamp duty value itself is taxable as income from other sources; the flat received as a gift from the friend, who is not a relative and so no exception applies, has a stamp duty value of 65,00,000, well exceeding the 50,000 threshold, so the entire 65,00,000 is taxable in Mr. Oza's hands as income from other sources, since the property was received entirely without consideration. Where immovable property is received for inadequate consideration, a different but related test applies: it is taxable only if the shortfall between the stamp duty value and the consideration actually paid exceeds the higher of 50,000 or 10% of the consideration. On the second flat, the shortfall is stamp duty value of 48,00,000 less consideration paid of 40,00,000, that is 8,00,000; 10% of the consideration of 40,00,000 is 4,00,000, and the higher of 50,000 and 4,00,000 is 4,00,000; since the actual shortfall of 8,00,000 exceeds this threshold of 4,00,000, the provision is triggered, and the shortfall of 8,00,000 itself, not the full stamp duty value, is taxable as income from other sources in Mr. Oza's hands, in addition to the 40,00,000 he actually paid remaining his cost of acquisition for any future capital gains computation on that flat.

Practice — Capital Gains and Income from Other Sources

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